Week Ahead: Debt Ceiling Drama To Continue as USD Pushes Higher

14/05/2023

After a packed few weeks of major risk events, focus turns to the overall macro picture and hard economic data releases to influence price action. In the absence of less bad news from the US banking sector, market volatility has sunk in the Vix, commonly known as Wall Street’s “fear gauge”. It is now back below its long-term average. The index, which reflects expected stock market swings in the S&P 500 over the next 30 days, has closed below this level 57 times so far this year. This compares with just 23 times in the whole of 2022. The May 1 low at 15.51 was the lowest reading since November 2021.

Fears about US interest rate rises have eased, especially after last week’s latest US inflation data. This showed elevated monthly prints, but a softer side to service price pressures in the part of the economy which has been running particularly hot. This triggered a move lower in US Treasury yields with money markets pricing in around three 25bp rate cuts for the rest of this year. A series of Fed speakers this week could see them push back against this dovish pricing given the job market remains tight and that both core and headline monthly inflation data is still strong.

This could give added legs to last week’s dollar rally which is battling with the US fiscal drama and debt ceiling crunch, as well as lingering banking stress and the tightening in lending conditions. The base in the DXY around 101 was solid enough to see a push higher last week. This advanced above long-term trendline resistance. This now becomes support around 102, with the 50-day simple moving average at 102.51 initial support.The main data point will be US retail sales while the weekly jobless claims numbers are also getting some attention as they appear to be moving higher as a lagged response to the surge in job lay-off announcements.

We get key UK data out on Tuesday. Labour market figures with wage and employment data is an important release for the MPC at the Bank of England. Policymakers said at last week’s meeting that more tightening will be required if inflation proves “persistent”. Strong wage growth has been a big part of this with markets currently pricing in more than 42bps of hikes by September. This essentially means one 25bp hike in June and around a two-thirds chance of another one. Any softening of wage growth will dent these bets on rate rises and see GBP struggle.

 

Here are the major risk events of the week: